RICHARD KOO: Emerging Markets Are In For A 'Tumultuous New Era'

Great stuff here from Richard Koo of Nomura, who weighs in on the
recent selling in emerging market currencies (and equities and
debt).

His take: This is the price emerging markets are paying for not
being more vigilant about hot money rushing into their economies
after the Fed announced QE after the U.S. crisis. The emerging
market, he argues, could have prevented the big rush of foreign
cash through prudent measures, but that they opted not to take
any pain, and now they're paying the price for going the easy
route.

He concludes that we're now in for a "tumultuous new era" for
emerging markets as QE gets unwound.

... the recent announcements would not have been necessary if
these countries had taken advantage of these measures to restrict
capital inflows from the US. They did not do so probably because
restricting capital inflows is extremely unpopular. In nations
attracting foreign capital, asset prices rise, people feel
richer, companies are able to obtain low-cost funding, and
inflation tends to be low with a stronger currency. Essentially
everyone is happy but exporters, which suffer from a stronger
currency. It takes a courageous policymaker to spoil that
pleasant environment with capital controls, even if it is
necessary for stable, longer-term economic growth. Therefore, the
authorities typically preserve the status quo, in which “everyone
is happy.”

Taiwan’s central bank has traditionally been quick to check on
and if necessary restrict capital inflows, making its governor,
Perng Fai-nan, an unpopular figure at certain foreign financial
institutions. But it was only because the authorities kept such
inflows in check that the Taiwanese economy escaped from the 1997
Asian currency crisis largely unscathed.

The lesson for emerging economies today is that in a world in
which the industrialized economies are free to engage in
quantitative easing at will, local authorities need to have the
courage to restrict capital inflows or stop them altogether. It
should also be remembered that the recent rise in US interest
rates occurred simply because Mr. Bernanke said the Fed was
considering scaling back its bond purchases. If the Fed were to
actually discontinue its purchases under QE3 or sell the bonds in
its portfolio, the resulting increase in rates would likely be
much larger. In that sense, both the US and the emerging
economies that will be affected as quantitative easing is wound
down need to prepare themselves for a tumultuous era.